``The lies the government and media tell are amplifications of the lies we tell ourselves. To stop being conned, stop conning yourself.”-James Wolcott, American Journalist
Meralco is in the spotlight anew.
The country’s premier utility firm, which holds the exclusive franchise for the electricity distribution for the National Capital Region (NCR), caught the public’s attention following a spectacular record romp by its share prices.
And last week’s parabolic vertiginous ride appears to have been playing out the blowoff phase of a conventional bubble cycle. (see Figure 1)
Figure 1: Bubble cycle (left) and Meralco (black candle right)
Importantly, like typical bubbles, the culmination of which can be identified by delusional rationalizations aided by experts exacerbated by media- Meralco’s skyrocketing price has been attributed to speculations on a prospective ‘tender offer’ (Bloomberg)!
Allegedly one of the titans involved [see King Kong Versus Godzilla at the PSE; Where Politics Trumps Markets] in the drama of the recent corporate joust has acquiesced to a purchase price of Php 300 per share which would require a mandated offering to minority stockholders!
Yet rising prices and some special trades (block sales and cross trades) have been used as signs to confirm on such myths.
Why do we think all these rationalizations seem ridiculous?
Simply said, because logical reasoning has been totally thrown out of the window!
As financial writer and investment speaker Joe Granville warned, ``the media is the biggest enemy of the small investor, mostly headlining the wrong news at the wrong times, playing on his misguided reliance on fundamentals and his normal fears and greeds.”
Putting A Perspective On Meralco’s Price And Corporate Disconnect
To put on some level headed perspective we will deal with some key issues.
First, on a year to date basis, despite the recent turbocharged upsurge, Meralco hasn’t been the only leader with 284.87% of gains (as of Friday’s close).
Other issues like Phisix component mining giant Lepanto Consolidate
As an aside, I wouldn’t suggest that the latter two would seem in a bubble considering the U-shaped recovery vis-à-vis Meralco’s actions which appear to have replicated the motions of a bubble paradigm as shown in the chart.
Although from a trough to peak basis, Meralco, hands down based from last year, does hold the tiara for market outperformance (700%).
Nonetheless, one must be reminded that past performances are not indicative of future outcomes.
Two, Meralco’s share in the Phisix has now jumped to 7.7% from less than 1%, as we similarly pointed out in Beware Of The Brewing Meralco Bubble!, and now holds the second spot after PLDT in terms of free floated market cap.
This for a company whose profits are constrained by political forces! (see below)
Meralco has effectively, leapfrogged over former heavyweights Ayala Corp, Bank of the Philippines, Globe Telecoms, Ayala Land and SM Investments.
With Meralco’s share of the Phisix gaining more weight, any ensuing volatility from its share prices will likely be reflective on the directions of the Philippine benchmark unless counterweighted by the lagging erstwhile behemoths.
Three, financial valuations, if any of these apply at all, have ENTIRELY been jettisoned for wanton speculations and nonsensical justifications.
As we discussed in Meralco’s Run Reflects On The Philippine Political Economy, the share price movements in the local markets hardly reflects on corporate fundamentals.
The first three factors cited above have clearly been validating our Livermore-Machlup model where Philippine equities move in tidal fashion underpinned by liquidity or loose monetary landscape.
This climate essentially begets a predominant horse racing outlook or mentality, where canards touted as facts mostly emanating from the foibles of cognitive biases.
In short, NO liquidity from loose monetary policies equals NO bubbles, and all the rest are simply footnotes.
As writer Peter McWilliams warned (bold highlights mine), ``The media tends to report rumors, speculations, and projections as facts... How does the media do this? By quoting some "expert"... you can always find some expert who will say something hopelessly hopeless about anything..” Indeed.
Fourth, common sense should dictate to us that perhaps none of these engaged (supposedly cunning and astute) Taipans, whom have built their wealth and “credibility” over the years, would likely pay for excessively or overpriced assets, unless they have other undeclared agenda in mind, which are exclusive of profits meant for the institutions which they represent.
Yet, any outrageous and reckless acquisitions, that would put at risk the interests of such institutions involved, could provoke a minority shareholder revolt. That’s assuming shareholder activism is alive here. Nevertheless, even in the absence of it, we should expect the minority foreign shareholders to vote with their feet.
In short, the supposed buyout, from the alleged stratospheric levels, signifies as tremendous costs to the interests of the company they represent from both the majority and minority stakeholders’ perspectives.
Needless to say, the present day hysteria from rising share prices is temporal in nature and subject to market cycles and does NOT represent the underlying fundamentals. Unless people think that these tycoons are dimwits, I would bet on the opposite…that the so called godfathers involved are cognizant of this!
Fifth, even if the so called buyout does occur, it is less likely that such deal would be consummated in transparency or reflective of market conditions.
These titans could have such transaction wrapped up much earlier than known by the public, or have done so with attendant compromises such as rebates et.al., and could use recent actions as a partial exit point to profit from today’s insanity.
Lastly, as we have been repeatedly arguing, the Meralco brouhaha is beyond the sphere of normal financial analysis because it is a POLITICAL SENSITIVE public listed company.
You can’t just attribute earnings without comprehending on the business model from which the company operates on.
Besides, here, the interests of the owners under the said platform are divergent from the interest of the minority shareholders.
Here is why.
Meralco’s Business Model: From RORB TO PBR
Lately, Meralco’s business model has shifted from Rate of Return Based (RORB) to Performance Based Rating (PBR).
According to GMANews.tv, ``The new PBR scheme also replaces the return on rate base (RORB) formula, which charges customers for using Meralco assets — including posts and cables — in bringing electricity to its end-users.
``Under the RORB, public utilities such as Meralco are disallowed from charging rates exceeding 12 percent of the worth of its total assets.”
So what’s PBR?
According to the same article, ``The new scheme provides “rewards and penalties for performance and non-performance respectively, Jose de Jesus, Meralco president said.
``Under the said mechanism, Meralco may be required to pay fines should its performance — such as failing to immediately respond to a blackout — fall below certain standards.”
And why PBR?
According to the “quasi independent” regulator of Meralco the Energy Regulatory Commission (ERC),
``The ERC adopted the PBR for distribution utilities starting in 2005 pursuant to its authority under Section 43 (f) of Republic Act No. 9136 (EPIRA) to adopt internationally accepted rate making methodologies. PBR strives to achieve a balance between efficient price levels, allowing utilities efficient revenue to ensure their sustainability, and maintaining or improving network service performance levels. It provides strong incentives to improve operational efficiencies. International experience (Australia and United Kingdom) indicates that, over time, with its built-in mechanisms for incentives and fines depending on the utilities’ performance, PBR leads to reductions in the real price of electricity distribution while improving service levels.”
Aside, the ERC has required Meralco to implement a subsidized rates for the poor by the so-called “NEW LIFELINE program, where ``The ERC reiterated that customers consuming only 20 kWh and below shall continue to enjoy the 100% discount granted them and shall pay only the adjusted PhP5.30 per month metering charge, while the other lifeline customers shall enjoy a discount corresponding to the consumption level under the new lifeline program approved under the DTI case, including the PhP21.00/customer/month minimum charge.”
Implications Of The Business Model: Absolute Dependence On Political Discretion!
What ALL of these means:
1. Basically prices charged to the paying consumers of Meralco are solely determined by the ERC and NOT by the markets.
This means that Meralco’s profits are ultimately determined by fickle political winds.
As Ludwig von Mises described of Bureaucratic Management of Private Enterprises, ``But ours is an age of a general attack on the profit motive. Public opinion condemns it as highly immoral and extremely detrimental to the commonweal. Political parties and governments are anxious to remove it and to put in its place what they call the “service” point of view and what is in fact bureaucratic management.”
Think $100 oil. Rising energy prices are likely to stoke political discomfort among the society’s underprivileged from which would force politicians to focus on “windfall profits”.
Yet, in a world where profits will be deemed as inconsistent with political interests, the owners of Meralco will likely wring profits out through other mechanisms, e.g. off balance sheet transactions, loans or contracts to affiliated parties, transfer pricing and etc.
In short, where financial reports will unlikely be transparent, the interests of the owners of Meralco and the minority shareholders departs.
2. Meralco maintains a subsidy for the poor from which are tacitly charged to the account of the middle and high income consumers.
This exemplifies as a “private” company, functioning under stringent control of political interests, conducting the political redistribution aspect in behalf of the government. Hence Meralco acts as a subcontracted implementing agent under political behest.
This implies that economic rents or “profits” for Meralco’s owner managers will only be attained under the auspices of the political leadership for as long as the political interests are served.
3. Under the PBR, the ERC determines the “carrot and stick” for Meralco.
Basically, Meralco’s lifeline hangs on ERC’s dictate!
This implies that the ERC and Meralco will haggle over what comprises as sufficient or inadequate under the PBR guidelines and NOT the consumers.
And since rules are always technically subjective and subject to nonlinear or amorphous interpretations, they will be subject to compromises. Ask the lawyers.
Therefore this implies two things:
One absolute subservience to the political office, where to quote Ludwig von Mises in Bureaucracy, ``Under this system the government has unlimited power to ruin every enterprise or to lavish favors upon it. The success or failure of every business depends entirely upon the free discretion of those in office.” (bold highlights mine)
Second, instead of looking after the welfare of its clients (Metro Manila consumers), the unlimited dependence on the discretion of the government bureaucracy means conflict of interests from parties involved abound.
Principally, the owner’s priorities will mostly be directed into the realm of public relations; of wheedling or currying favor with that of ‘The Powers That Be’. Satisfying the public will requirements will be subordinate to this.
Again from Ludwig von Mises, ``In such an environment the entrepreneur must resort to two means: diplomacy and bribery. He must use these methods not only with regard to the ruling party, but no less with regard to the outlawed and persecuted opposition groups which one day may seize the reins. It is a dangerous kind of double-dealing; only men devoid of fear and inhibitions can last in this rotten milieu. Businessmen who have grown up under the conditions of a more liberal age have to leave and are replaced by adventurers.” (bold emphasis mine)
The sordid and unfortunate experience of the current managers in the besieged Lopez group (who appear to be outgoing****), having to oppose the PGMA administration politically, serves as fundamental and shining example of the consequences of political defiance.
So those nurturing the view that owner-managers of political enterprises will be looking for one dimensional financial bottom line growth are living in a world of fairy tales.
Thus, financial statements have little relevance to Meralco’s valuation as a financial security because economic rents accruing the owner-managers of Meralco may come in sundry forms, than simplistically “profits” as defined by textbooks.
Besides, as pointed out in Has Meralco’s Takeover Been A Good Sign?, the current managing owners of Meralco have to deal with socio-political, bureaucratic and political risks, which ultimately mean that they need to be in constant harmonious relations with the current and forthcoming political leaders.
These are things that are learned outside of traditional or mainstream school curriculums. And yet these signify as unorthodox or contrarian views that operate realistically.
4. The ERC’s leadership is appointed by the President of the Philippines.
This makes the agency hardly independent as purported to be, but instead beholden to the administration.
Again since political appointments are almost always based on political affiliates or interests and are hardly ever about virtues or meritocracy, the direction of regulatory implementation and compliance will likely be dependent on the caprices of the political leadership.
Conclusion/Additional Comments
All these imply that the rewards from the ownership of Meralco comes with the blessings of the ‘Powers That Be’ combined with a possible implied backstop (guarantee) in the case of failure or bankruptcy, provided that the interests of the company’s owner managers or political entrepreneurs operate along the lines of interests of the incumbent political leaders.
Therefore it would be foolhardy or naïve to believe that the tycoons that got engaged in Meralco with billions of pesos of investments, had been there to only leverage on the political misfortunes of the present owners and to speculate on share prices while at the same time ignoring the risks associated with the political aspects of having a stake in Meralco.
Also, this implies that the changing dynamics of the ownership structure of Meralco strongly alludes to the next president-the identity of which only the kingmakers or the chief Meralco proponents know.
****The prevailing notion is that there has been an ongoing power struggle in Meralco.
For me, this seems like an oversimplistic crock.
In my view, both protagonists appear like unheralded allies, only awaiting the appropriate opportunity for a graceful exit for the Lopezes, which I think should come after the elections.
As per Joe Studwell in Asian Godfathers, ``The reality is that tycoons are typically forced to invest together because of the environment in which they operate.” (emphasis mine)
Considering that Meralco’s destiny is fundamentally intertwined with the Presidency, this probably implies that both godfathers could be straddling in support of different candidates in the forthcoming Presidential elections where its outcome will decide who among the two groups will takeover.
Although it is most likely that a price agreement for the prospective exchange may have already been sealed but perhaps at prices much less than the rumors (my guess is anywhere Php 90-120).
Moreover, it has been my inclination to believe that the Meralco saga will unfold similar to the Philippine Airlines
Finally, of course, both parties would want to see Meralco’s share prices remain elevated, hence through various associates or intermediaries, they might continue to float stories from which the public so eagerly yearns for, as appetizer for their innate speculative instincts operating under today’s loose monetary environs.
However, the idea is-once the political matters have been settled, excess shares could be sold through the markets or that if any contingency arises (such as a dark horse winner in the Presidential elections) both parties can avail of present lofty prices as an exit strategy.
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